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GameStop (GME) Stock Rallies More Than 17% on Buyout Hearsays

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GameStop Corp. (GME - Free Report) showcased a superb bull-run on Jan 4, 2019, with its shares up 17.5% on rumors related to its potential buyout. Per sources, the company might announce a deal associated with its own takeover in February.

Previously, there were rumors of private equity firms such as Sycamore Partners and Apollo Global Management being interested in the deal. In June 2018, certain media reports noted that Sycamore Partners could be the possible forerunner in this deal.

GameStop has lost close to 21% in a year’s time, comfortably outperforming the industry’s decline of 23.1%.



Well, it looks like this move comes after the company’s multiple failed attempts to revive growth. GameStop has been under pressure for quite some time now, owing to consumers changing preferences and increasing inclination toward digital games. Moreover, the company has been plagued by softness in used games or pre-owned software, due to the launch of fewer titles, decrease in physical software sales, muted demand owing to digital access to older titles and fewer promotions offered to customers in the third quarter of fiscal 2018. In the third quarter, pre-owned and value video game products sales decreased 13.4%, following a respective decline of 9.9% and 5.8% in the second and first quarters of fiscal 2018.

Keeping in these lines, the company had trimmed its guidance for fiscal 2018, despite better-than-expected third-quarter results. For the fiscal year, management now envisions earnings per share of $2.55-$2.75, down from $3.00-$3.35 projected earlier. The company continues to expect fiscal 2018 sales to decline 2-6%, while comps growth is expected in a band of flat to negative 5%.

Additionally, GameStop has witnessed dismal margins for the past few quarters. In the fiscal third quarter, gross margin contracted 160 basis points (bps) to 33.1%, following a decline of 80 bps and 30 bps in the second and first quarters of fiscal 2018, respectively. Contraction in gross margin in the last reported quarter was primarily due to the improvement in sales of lower-margin categories. Persistence of this trend is a threat.

Further, it ventured into the smartphone market via Spring mobile, which didn’t work in the company’s favor. Recently, the company inked a deal to sell Spring Mobile business to Prime Communications for $700 million in cash. The company plans to use the net proceeds from the sale to lower debt, reinvest in core video games and collectibles businesses, and fund share repurchases.  Also, in the early days of fiscal 2018, GameStop had undertaken restructuring initiatives to boost growth.

In fact, GameStop has been looking into every corner to revive growth. This Zacks Rank #3 (Hold) company remains committed toward undertaking promotional activities to strengthen customer base. Also, its collectibles business looks stable, buoyed by continuous growth in domestic and international collectibles businesses. The company believes that it has solid potential for sustained growth in this business.

That being said, we cannot ignore the fact that the company is still struggling to make ends meet. Let’s see if the much talked about acquisition of GameStop can put an end to all its worries.

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